Two Hyatt hotels planned for North San Jose, latest in Silicon Valley hotel rush

Hyatt Hotels Corp. is joining the Silicon Valley hotel rush with two new properties planned for a prime corner in North San Jose.

The new $65 million Hyatt Place and Hyatt House project would add about 330 rooms between them on a roughly six-acre site at North First Street and East Brokaw Road. Hyatt is under contract to purchase land, a former car rental lot, from South Bay Development Co. for an undisclosed price. The project will likely start construction in the second quarter of 2015, with a 16-month build-out.

The pending deal is the latest example of Hyatt’s aggressive growth plans for its “select service” properties such as Hyatt Place and extended-stay brand Hyatt House. The Chicago-based company, with more than 530 properties in its worldwide portfolio, is putting its own money behind its expansion effort. That’s in contrast to many other hospitality groups, which prefer a franchise-heavy, “real-estate light” strategy.

“One of Hyatt’s corporate endeavors is trying to get select-service product into strategic, high-barrier locations throughout the U.S.,” Chris Gebert, vice president of corporate real estate development for Hyatt, told me. “In the last few years, they've made the decision to use their balance sheet to do Hyatt-owned corporate deals.”

Hyatt, which turned in plans to the city for the hotels last week, joins an increasingly crowded hotel development pipeline in the South Bay. As The Business Journal reported in January, Kalthia Group is planning a similar dual-branded Hampton Inn and Suites/Home2 Suites across the street, at 2116 N. First St. Numerous others would add hundreds of rooms up and down Silicon Valley.

While it is uncertain how many will actually line up financing and get built, experts said it’s no secret what is driving the development push.

“To a large degree the demand generators are the tech companies,” said Thomas Callahan, co-president and CEO of PKF Consulting in San Francisco. “They’re all doing well and generating a good amount of demand right now.”

Numerous new projects might spur fears of oversupply, but Callahan said the market is ready to absorb the additional rooms.

“Back in the run-up to the first tech crash, about 4,000 rooms were added to the Peninsula,” he said. “Now, there’s a fair amount of interest in new hotels. But capital is smarter now. There’s not going to be more than 2,000 rooms in this cycle. Absolutely, they can all be absorbed.”

The activity is not limited to new development. In Sunnyvale, Shashi Group just closed on the Pacific Inn, a dated property at 170 S. Sunnyvale Ave. in the city’s reviving downtown. Shashi — which opened the region’s first Aloft hotel in Cupertino last year — plans to renovate the property and has hired noted hospitality design firm HBA International and architecture firm Axis to lead the effort.

“We’re looking to have a destination hotel in downtown Sunnyvale,” said Alex Stanford, president of design and construction for Shashi Group. “With LinkedIn’s new campus going in there, the historic downtown – this area has great potential. And there’s very little room product in the market right now.”

Stanford declined to state what the hotel’s flag would be, but said it would target the same demographic as the Aloft in Cupertino.

Meanwhile, the owner of the Sheraton Hotel Sunnyvale recently turned in plans to add a nine-story, 169-room tower to its existing property at 1100 N. Mathilda Ave., in business district thick with Google offices and spitting distance from where Jay Paul Co. plans to build a massive new office campus called Moffett Place. Executives with Goldman Sachs, which owns the project, declined to comment on it last week.

“If you look at San Jose as a whole, the Class A office market is very deep,” Callahan said. “And with the performance of select service properties in the last two years or so, it warrants two new hotels there.”

The development of two branded properties on one site is part of a growing trend that allows the owner to target different travelers, while taking advantage of economies of scale — potentially sharing key staff and facilities.

“It’s literally all the rage,” Callahan said. “Part of it is diversification of risk. Just like in your 401K, you have stocks and bonds.”

Hyatt, which reports fourth quarter numbers this month, posted Q3 2013 revenue of more than $1 billion, up 5 percent compared to a year ago.

Hyatt remains an owner, manager and franchiser of its properties. But the ramped-up focus on corporate-backed developments allows Hyatt to leverage its own financial strength to fund new projects. Despite the improved economy, there are still challenges to lining up financing for franchisees.

The chain has “many more” development projects in California in queue, though Gebert declined to disclose where they would be located.

“This is going to be one of many,” he said. “We have a great opportunity to put these projects into place.”